Bradley’s Bankruptcy Basics: Automatic Suspension Considerations When Companies File For Bankruptcy | Bradley Arant Boult Cummings LLP

Automatic stay is a procedural tool in a bankruptcy case that effectively stops the efforts of creditors to collect unpaid obligations from a debtor. As we saw in more detail in our previous article, immediately after filing a bankruptcy claim, an “bankruptcy asset” is created which includes virtually all of the debtor’s assets. When filing the petition, to avoid a violation of the automatic stay, creditors should refrain from, among other actions, pursuing an action against the debtor, enforcing a judgment against the debtor, seeking to obtain possession estate bankruptcy property; and attempting to create, perfect or assert a lien on the estate property. This immediate pause in collection efforts is intended to protect the debtor by allowing a reprieve from creditors’ collection efforts. In addition, the automatic stay ensures that no creditor receives a distribution greater than what that creditor would be entitled to under the Bankruptcy Code. Since the Bankruptcy Code allows debtors to recover damages from creditors who act in violation of the automatic stay, creditors should proceed with caution to avoid creating a basis for such relief.

For commercial creditors, dealing with issues arising from automatic stay can present unique legal and policy challenges. An important legal problem presented by “small affairs” (defined in the code and essentially a case where a debtor is a private company, has total debts below a certain amount and did not choose that subchapter V s ‘applies) is that the stay may not apply to the case. Section 362 (n) of the Bankruptcy Code provides an exception to automatic stay and applies when a debtor files for bankruptcy while a small business case is pending or within two years of confirmation of the bankruptcy. ‘a plan or the rejection of a case in a small business case. Therefore, when a debtor falls within this exception, the acts of a secured creditor to obtain possession of the assets of the estate are not excluded by the automatic stay.

If automatic stay applies, however, this is not a permanent restriction. A secured creditor can obtain a waiver of the automatic stay to take possession of his collateral. The basic grounds for obtaining a suspension exemption are (i) justification or (ii) demonstration that, in relation to the suspension of an act against property, the debtor has no equity in the property and ownership is not necessary for an effective reorganization.

Although the method of obtaining a stay is similar in business and consumer bankruptcy cases, creditors will benefit from using different strategies depending on the type of case. Two policy questions that arise in business bankruptcies include (1) when to request a stay and (2) what types of assets to move to get a stay.

Time of reduction of the stay

Under bankruptcy court rules of procedure, stay of stay is granted on application of the party requesting stay of stay. Thus, a secured creditor has control over the timing of their stay petition and should view that timing as part of their overall strategy. Moving early in the case to obtain a stay can benefit a creditor, even if it fails, by laying the groundwork for a reason to lift the stay later in the case. In addition, the Bankruptcy Code ends the suspension 30 days after a request for redress, unless the court orders that the suspension continue. Additionally, a request for a stay may be a prerequisite for obtaining adequate protection, which is more frequently provided in business bankruptcy cases than in consumer cases. More information on adequate protection will be discussed in future articles from Bradley’s Bankruptcy Basics.

Debtors of an operating business file for bankruptcy under Chapter 11 or Subchapter V of the Bankruptcy Code. In a Chapter 11 or Subchapter V case, the need for a creditor to request a stay of stay will usually end upon confirmation of the plan or dismissal of the case. At this point, the assets of the estate can be returned to the creditor and, if the plan is confirmed, the debtor can be released from all previous dischargeable debts. As a reminder, the cases of chapter 11 and subchapter V are unique and differ from each other because a main objective of subchapter V is to facilitate reorganizations of small businesses, but for both types of cases, the plan bankruptcy becomes the governing contract between a debtor and his creditors. As such, creditors are reminded to carefully review the plan and update their accounts and procedures accordingly.

If a creditor has perfect security and believes that they will receive more value by accepting payments under the plan than they would by immediately taking possession of the collateral, the best strategy for the creditor may be to wait. confirmation, allow the automatic stay to end, and then request a recovery on the collateral if the debtor defaults after confirmation. As such, it is important that creditors carefully weigh their treatment under the proposed plan against the cost of obtaining relief from the suspension and liquidation of collateral. Often it makes sense for creditors to proactively discuss their options with the debtor’s lawyer to negotiate an out-of-court resolution rather than incurring the costs of suspending and liquidating collateral early in the case. . Of course, if the debtor is unwilling to negotiate or does not respond to communications, filing a stay motion can start a fire, so to speak, which will bring the debtor to the negotiating table.

Assets to target for reduced stay

From a practical standpoint, the unique circumstances of a bankruptcy case will determine which specific assets a creditor will target for a stay stay. But a basic analysis that a secured creditor should consider up front is whether their collateral has more value in or out of the estate. This can be a simple consideration, such as in a Chapter 7 liquidation, where obtaining collateral as quickly as possible probably preserves the most value. This consideration becomes more complicated in a Chapter 11 reorganization that requires the obligee to weigh the value of prompt possession of its collateral against the potentially higher value available because the obligor has completed the plan or the possibility. that the value of the collateral can be increased by the debtor (for example, a collateral that is in inventory could become more valuable as the case progresses).

A clear example of an asset on which a creditor would want to move in order to obtain a stay is one for which the second ground for suspension (i.e. if the debtor does not need the collateral for his reorganization, it is unlikely that the value of the collateral is increased by remaining part of the bankruptcy estate. However, the creditor has the burden of proving that the debtor has no capital in the collateral, so the creditor must assess how well he will be difficult to prove the value of his collateral. In the simplest case, a debtor’s own schedules will show that the debtor has no equity in the property, but in other cases the valuation of assets will require an assessment and testimony from an expert assessor or witnesses, and these additional steps increase the cost of obtaining relief.


The decision to seek an exemption from the automatic suspension raises both legal and policy questions. In making their decision, a secured creditor should be mindful of policy decisions while avoiding a violation of the stay by only taking steps to secure security with leave of the court.

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